Release Explanation: Gross Domestic Product (GDP) determines the total worth of all goods and services produced by the economy. GDP is the broadest measure of activity and the primary gauge of the economy's health. To foreign investors, a strong economy is viewed favorably as it spurs investment opportunities in the domestic stock and bond markets. More importantly, the central bank is more likely to raise interest rates in the face of a strong and growing economy.
Trade Desk Thoughts: In the fourth quarter, the U.K. economy contracted by 1.5%, unrevised from the preliminary release. In the third quarter, the U.K. economy posted a -0.7% read. The two consecutive quarters indicate the U.K. economy has officially entered into a recession, similar to the Euro-zone and U.S. economies. From the fourth quarter of 2007, the U.K. GDP contracted by 1.9% in Q4 2008.
Output of the production industries fell 4.5% compared with a fall of 1.7% in the previous quarter, mainly due to declining manufacturing output. Construction output fell 1.1% over the quarter, unrevised from the previous estimate.
Output in the service industries fell by 0.9% in the fourth quarter, down from a fall of 0.5% growth recorded in the previous quarter. Household expenditures fell 0.7% and are now 0.2% lower than the fourth quarter of 2007. Government final consumption expenditures rose by 1.5% and are now 4.4% higher than the fourth quarter of 2007.
This is the biggest decline recorded in a quarter since 1980. The U.K. GDP rose only 0.7% in 2008, down from nearly 3% in 2007. According to the Bank of England estimates, the downturn will continue in the first part of 2009, while analysts say it will continue throughout the whole 2009.
Forex Technical Reaction: The pound fell 60 pips shortly after the release. For the last three days, the pound has struggled to break free from the swing area formed by the 20 and the 50-day simple moving averages, but has failed until now.